FIRE Starter: A Brief Intro to Personal Finance’s Hot New Acronym

Someone asked me last week to write about the FIRE movement. If you’re a personal finance aficionado, you’ve probably already heard of FIRE. But if not, then this post will get you up to speed. Get you extinguisher; we’re gonna ignite this FIRE starter.

What’s FIRE, in simple terms?

An offshoot of Burning Man? No.

A gathering of pyrotechnicians? No.

A group of people hoping to retire early via financial independence? YES!

FIRE stands for financial independence, retire early. What and what? The main idea is quite simple: if you save enough money, then you can cover all your living expenses via interest from your investments. That’s Financial Independence. You no longer need a paycheck, because you’re living off your own investment’s interest. It’s definitely possible to reach FI before traditional retirement age, so why not Retire Early? FI->RE = FIRE.

Quick FIRE starter math:

Imagine you’ve saved $1 million. I know, it’s a lot. But over the course of a career, it’s achievable.

And then you assume that your $1 million nest egg grows by a net 4% per year. 4% is fair.

4% of $1 million = $40,000/year

So, if you could live off of $40K per year, you could live off interest forever, without tapping into the original $1 million. Time to lay back and learn bridge. Or MahJong?

It’s simple, but that’s FIRE in a nutshell. If there’s one takeaway from this FIRE starter, remember that math example. $1 million x 4% interest = $40K per year.

If you want to see just how early you could retire, check out the 4th plot here.

FI is great, even if you aren’t interested in FIRE

The tenets of the financial independence are great. The advice “save more money” is like saying “eat more vegetables”…odds are, the advice applies to you. And even if you’re already doing enough of it, doing more is probably still helpful.

Living frugally kills two FIRE birds with one stone. You can save more money up front (1), while the total investment you need at the end of the day is smaller (2). The percentage of income that you save—known as your Savings Rate, or SR—is directly proportional to how much longer you need to work before you reach FI.

So even if the full FIRE isn’t for you, the basic behaviors behind the movement are generally helpful to anyone’s personal finance.

FIRE extinguisher

Now, my criticism.

As a whole, the FIRE movement suffers from survivorship bias. Survivorship bias occurs when a conclusion is drawn based on incomplete data, because some data has “survived” a certain selection criteria, while other absent data “failed” that selection.

The FIRE stories that make headlines in Forbes and CNBC sound awesome, but those are the ones that “survived” for Forbes or CNBC to discuss them. The typical success stories are similar in striking ways. In each one, a young, highly-educated person works a Silicon Valley-esque job, lives frugally, makes a couple smart (see: lucky) investments, and retires around age 30. 1-2-3-4, sounds easy! But let’s break it down a little bit.

The job: making $200K a year is a wonderful start. But that’s not a realistic salary for 99% of the population.

Frugal living: we’ve talked about this before. You can eat a lot of Ramen, but it’s really hard for normal people to save 30% or 50% or 70% of their income.

Smart/lucky investments. Maybe you bought a house during the recession, invested a ton of money when the market was low, or helped your buddy start his now booming small business. That’s awesome! But that’s not something that the laymen can assume will also happen for them.

The glaring omissions. What about kids? They’re rarely in the equation. Bad luck? Not usually. It’s good luck that makes young FIRE starters. Average Joes and Janes? Hardly…

Who doesn’t like the idea of retiring at age 30 and living the exact lifestyle that you want to live? Of course it sounds good! But there aren’t any FIRE stories of “teacher talks about mitochondria for 11 years, retires at 34” or “hard-working pipe fitter works 20% overtime, retires at 36.” FIRE—or at least, FIREing at exceedingly young ages—is a luxury combination of elite earning, smart saving, and lucky investing. It’s not for everyone.

To make matters worse, the FIRE movement–at least, how I perceive it–is a simply a condensed rat race. FIRE hopefuls brag about their monthly savings rate, constantly live in the future (“5 years until FIRE, and I’m counting down the days”), burn the candle at both ends to reduce spending and increase earnings. Fun?…that can wait until I FIRE. Food?…beans will suffice. Children?…in this climate (disaster)? I don’t think so!

I’m not an evil fireman, quenching people’s FIRE starting with glee. I do think it’s a good idea. But it’s typically realized in a myopic manner.

FIRE starter and you

For most people, the idea of retiring at 30 or 35 isn’t reasonable. It’s akin to that kid in high school—no rhythm, no voice—who adamantly pursued his dream of being the next Michael Jackson. Or his friend, unathletic and stumpy, whose college plans were based on obtaining a basketball scholarship. Dreams can be great, but unrealistic dreams are fruitless.

If this FIRE starter has you interested, then pursue it! Just set realistic expectations. In my opinion, you should think about FIRE as follows:

The tradition that you should retire at 67 (or 65, or 62) is not set in stone. It’s very reasonable to plan a retirement earlier than that. 55? 50? Even earlier? Check out a FIRE calculator and pencil out what your future FIRE could look like.

Saving money is good. Saving more is better. Plan for the future, think long-term. Whether you FIRE or not, this advice applies.

If you’re sick of the grind, the solution might not be “you need to retire.” Instead, it might be “find something you enjoy doing.” Life is long. There’s plenty of work left to be done.

People who are pursuing FIRE generally have a set of behaviors in line with Best Interest thinking. While I’m not 100% on board with all FIRE ideas, I don’t want to throw the baby out with the bathwater, or exhibit the narcissism of small differences. So, if you read FIRE blogs or subscribe the FIRE forums, I think you’ll learn something worthwhile.

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About Jesse Cramer

I’m Jesse. I’m an engineer, a new owner of an old home, and an avid reader/writer. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@BestInterest_JC) or on Reddit (u/BestInterestDotBlog). Many of my posts have been directly influenced by my readers. It’s the most fun part of writing this blog. And as always, thanks for reading the Best Interest.

Hey Jesse, great thoughts. I agree with you! I did a survey of financial blog readers and found results in line with what you’re describing here. High education, high income. One respondent actually specifically said they feel excluded by the FIRE movement because it feels geared towards white, male tech workers. It’s a real problem!

I agree that we need to work towards actions and financial literacy that is helpful for a larger part of the population, people with more moderate incomes.

I went through your survey. Very, very thorough! I was pleasantly surprised to see the average (hopeful) retirement age around 50. Sure, it’s younger than typical. But it’s reasonable.

I can’t agree more with your final comment…there’s a large swath of the population that gets zero benefit from “Save 70% of your income, look at Roth conversion ladders, and for God’s sake utilize best practices for tax harvesting!”

How do we target that large swath? Because the PF blogosphere doesn’t need another “Here’s how interest works” post, does it?